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Worry over shaky Euro banks pushes up interest rates, threatening the global economic recovery

posted on May 24, 2010 at 9:19 am
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The euro debt crisis is moving from the euro to European banks.

Dollar LIBOR, the London Interbank Offered Rate that banks pay for short-term loans in dollars, climbed to 0.51% today. That’s the highest level since July 16, 2009.

A rising LIBOR reflects increasing worries about the credit-worthiness of banks.

 Certainly the Bank of Spain’s seizure of CajaSur, one of the weakest of Spain’s weak local banks, over the weekend did nothing to reduce worries about the financial sector. CajaSur is just one of the banks that the central bank of Spain will close under a new state-financed plan. Standard & Poor’s puts the cost of closing the weakest of the country’s local banks at about $28 billion. CajaSur lost $748 million on $340 million in revenue last year.

 LIBOR is a daily average based on a survey of 16 banks and besides heading upward in general that average shows in increasingly large spread between the most and least stressed banks.

 In today’s LIBOR survey, WestLB, a state-owned bank that had to be bailed out during the post-Lehman stage of the global financial crisis, showed the highest dollar LIBOR at 0.565%. HSBC Holdings showed the lowest rate at 0.44%.

 LIBOR has more than doubled this year under the impact of the euro debt crisis and looks set to climb higher.

 That puts more strain on the still shaky global economic recovery. The 3-month LIBOR is used as a benchmark for $360 trillion in global financial products, such as mortgages and loans, so an increase in LIBOR means an increase in the cost of credit for billions of consumers and millions of businesses.

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  • javos on 24 May 2010

    Risk indicators of all types are flashing caution…gold, treasuries, dollar, oil, markets (China, Australia, Brazil, etc.), advance/decline, new highs/new lows, VIX.

    Be very cautious. Take some profits.

  • yx on 24 May 2010

    You said in your Friday’s post about STO that the medium-term of fundamentals for STO has changed for the worse, but long-term is still OK. Would you please specify how long or how short the “medium-term” is in this case? Thanks.

  • robert1234 on 24 May 2010

    TO JAVOS: would you please expand on your comment. Are you looking at contrary indicators, parallel indicators. All flashing at once .. ! ?

    How can they all be flashing at the same time.



  • kelvinator on 24 May 2010

    Art Cashin, long time veteran NYSE floor manager just said that GE’s Jeff Immelt’s comment today that “Europe appears to be teetering on brink of financial disaster” is accurate and surprisingly frank. Cashin says any wrong policy decision by any euro country now could start negative market spiral that might not be stoppable. That’s why, although it seems this may be a buying opportunity in many stocks I follow, I just think there’s too much risk that April becomes top for the next downwave – i’ll be more hedged here and look to add to shorts on a rally and try to be ready to buy bargains lower. No one knows what’ll happen – just a matter of risk vs reward. I’ve been shorting the British pound since about 157 & it look like it may be good for travels further south.

  • GlassWizard on 24 May 2010

    Are the banks ‘Frogs’ too or some other swamp resident?

  • vintonbuck on 24 May 2010

    Scary times for sure, but I had to get my weekly gamblin fix so picked up some Vz on the drop. Those dividends look mighty temptin. I still have plenty of powder left. Only in a few stocks right now and they are all dividend payers. Thanks Jim for sharing all your great insights with us.

  • nukeage on 24 May 2010

    While everyone’s on the topic of “risk” . . . can anyone share his/her thoughts on the issue of current volume? Thanks.

  • yx on 24 May 2010

    Be careful of what GE’s Immelt has to say about Europe or Euro. Obviousely his company has a lot of loose if Euro further weakens.

  • cjxland on 24 May 2010


    What’s to share? Volume increasing, prices dropping… it means people are heading for the exits, is all. More sellers than buyers. Bale while the baling is good, divil take the hindmost. But, lets hope those volumes are mostly people, not quants- now, that is scary.

    For traders this is high risk and scary times; for investors, things are just starting to get good. As Jim has mentioned in a few places lately.

    FWIW Dept: I think we will eventually find a lot of good ol US frogs [banks] in this Euro swamp,somewhere. Frogs don’t change their spots, neither. Any new data here?

  • EdMcGon on 24 May 2010

    If anyone is interested…

    I sold DZZ and added SPXU to my portfolio of shorts. Gold is a bit too volatile now, and I preferred going short on the S&P 500 instead.

    For you diversified bears out there, my current portfolio consists of: SPXU, SDOW, SQQQ, EUO (my largest position), BGZ, TZA, and FAZ.

  • yx on 24 May 2010

    JP Morgan Chase is reportedly calling buy Brazil during correction.

  • cjxland on 24 May 2010


    I am wondering more how deep JPM is itself into the Euro crisis- and how soon We The People will have to be baling them- and GS and all the rest of their US buddies- out of that swamp. Rrribbbet.

    I’m looking at a new-ish Brazil infrastructure fund, BRXX, for when the price is right. And I will probably go with Jim’s [former] pick too- BRF. When the price is right.

  • yx on 24 May 2010

    Didn’t BRF made historic low last week?

  • cjxland on 25 May 2010


    BRF could well have, but that doesn’t necessarily make the price right… for me. Maybe for you…?

  • EdMcGon on 25 May 2010

    Buy now at your own risk.

  • javos on 25 May 2010

    Responding to Robert1234: Basic assumption: capital will flow worldwide (and almost instantaneously) toward the best risk/reward opportunities. So I watch and try to understand capital flows around the world..equity and bond markets, currencies, commodities, real estate, etc. From this perspective, I attempt to develop a sense of where risk is, i.e., where I don’t want to be invested. Today, all of the indicators I mentioned say to me that the perception of risk around the world is rising, and capital is flowing toward US treasuries, bonds, dollar, and gold, i.e., toward safety. Today I’m mostly in cash (capital preservation). If the US “bear” is confirmed, I’ll move some into leveraged short US equities (TZA and SDS).

    May help to know I’m 69 and have been made a fool of by the US market more times than I care to admit.

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